A company has incurred some routine maintenance costs. If they decide to capitalize these costs instead of expensing them, what would be the effect on cash from operations and cash from investing activities in that period?
A) Cash from operations would increase; cash from investing would increase.
B) Cash from operations would increase; cash from investing would decrease.
C) Cash from operations would decrease; cash from investing would increase.
D) Cash from operations would decrease; cash from investing would decrease.

Question

Quizplus · Accepted Answer

Capitalizing routine maintenance costs instead of expensing them increases cash from operations because it reduces the expenses reported in the income statement, thus increasing operating income and, consequently, operating cash flow. However, these capitalized costs are then reported as investing activities, leading to an increase in cash used in investing activities, which is shown as a decrease in cash from investing activities.

A Company Has Incurred Some Routine Maintenance Costs